A Sensible Deal Can Avert a 'Sequester' Disaster

By ALBERT R. HUNT | BLOOMBERG NEWS

February 17, 2013

WASHINGTON — Democrats and Republicans in Washington agree: It would be a disaster if the “sequester,” with its more than $1 trillion of cuts to U.S. defense and domestic spending, took effect on March 1, as scheduled.

Defense Secretary Leon E. Panetta says the reductions to the Pentagon budget would undermine national security; the cuts to already pared-down domestic spending will set back critical needs like cancer research; Head Start, the preschool program for low-income children; and funding for the Border Patrol. The U.S. economic recovery would be impeded, at a cost of as many as 750,000 jobs.

President Barack Obama says the cuts “are a really bad idea.” In a rare display of accord, the House speaker, John A. Boehner, says the “meat ax” approach would “weaken” the nation’s defense. Mr. Obama and Mr. Boehner were two of the authors of the 2011 sequester agreement, figuring a sensible alternative would have emerged by now.

It has not, and the sequester could kick in on March 1, even if only temporarily. It is a textbook case of Washington dysfunction.

Both sides created this debacle, but there is no equivalency of blame today. Any alternative must emphasize cuts in mandatory entitlement programs and add revenue. Mr. Obama, publicly and privately, has left no doubt that he will surrender the Democrats’ political trump card and accept cuts in entitlement programs like Medicare, which offers health coverage to the elderly and disabled. Republican leaders insist that they will not give any ground on new revenue, without which there can be no deal.

An impasse would be unsettling to markets and the economy in the long run, even if deficit hawks exaggerate the severity of the crisis.

“The 10-year budget outlook remains tenuous,” says Bill Gale, director of economic studies at the Brookings Institution. “Even if seemingly everything goes right — in economic terms and political terms — we are still on the edge of dangerously high debt and deficit levels.”

It is not hard to devise a feasible alternative, if the irrational politics are put aside. First, any deficit-reduction plan should wait two years. That is because, as broke as Washington is, the deficit has already been narrowed by almost $2.5 trillion over the coming decade. In the short term, the government needs to bolster the shaky recovery by spending more on infrastructure and other projects.

Then, it should put in place a long-term $1 trillion deficit-reduction package, half of which is achieved through entitlement cuts, one-third through tax increases and the rest by shrinking discretionary programs, chiefly defense, which are funded through annual appropriations from Congress. That would send an encouraging sign to markets and help the economy, but only if it is a long-term plan, rather than the one-year fix that Senate and House Democrats are proposing.

Entitlements or mandatory programs like Medicare and Social Security, the government retirement system, make up almost 60 percent of the U.S. budget and are the engine of chronic deficits. Getting $500 billion over 10 years would not be pain-free, though it does not have to hurt those who can least afford to sacrifice.

The president has said he would go along with the scope of the Bowles-Simpson deficit commission’s proposed cuts to Medicare. That is about $350 billion. It would not require cuts for the most needy but would contain a means test for more affluent senior citizens. A sensible deal would not increase the eligibility age and would introduce more stringent cost controls and hit up drug companies for a little more.

Half the remaining savings could come from changing the formula for the cost-of-living increases for Social Security and other inflation-adjusted entitlements. That is a realistic proposal if protections are carved out for the very poor and the very elderly. The Center for American Progress has offered workable specifics. The rest could come from cutting agricultural subsidies and other entitlement programs.

The White House would buy this, and it has been the dream of Republicans for years.

On taxes, Republicans contend that the fiscal cliff deal in January, which raised taxes on the wealthy by $600 billion, means any further revenue-raisers are off the table.

A number of party leaders also pay lip service to the Bowles-Simpson recommendations, which proposed $1 of new revenue for every $2 of spending cuts, after eliminating former President George W. Bush’s high-end tax cuts. If these Republicans have their way and the sequester or any alternative to it is exclusively spending cuts, that ratio would be more than four to one.

The easiest way to get those revenues would be a plan resembling the administration’s proposal to limit deductions to the 28 percent rate and then exclude charitable deductions from that cap. That would raise more than $300 billion.

The other Republican argument is that any tax changes should await broad tax reform. But limiting deductions would not narrow their options or dash their hopes of using changes to the tax code as a vehicle for lowering rates.

There are endless possibilities for curbing tax breaks in a revenue-neutral measure that also lowers rates, such as scaling back big-ticket items like the home mortgage deduction, the health care exclusion or the preferential treatment for capital gains. Other changes are politically appealing, like ending the carried-interest loophole for rich investors or the tax breaks for the oil and gas industries.

What should not be cut is nondefense discretionary spending, like veterans’ programs, medical and scientific research and education. Even without the sequester, these programs are headed toward their lowest level, as a percentage of the economy, since the Eisenhower administration.

An entitlements and revenue-based deal, however, would approximate the Bowles-Simpson targets, and engender confidence in markets and businesses. The politicians could then turn to tax reform, immigration, gun violence, maybe a modest climate-change measure, and substantive oversight.

As a bonus, a successful deal might also lessen public cynicism about Washington.